By Abhirup Roy and Akash Sriram
SAN FRANCISCO (Reuters) -The profitability of Tesla’s so-called affordable new cars will be in focus when the electric vehicle maker reports quarterly results on Wednesday, and analysts think that thousands of dollars in cost cuts per vehicle will not be quite enough to protect profit margins.
The Standard Model Y and Model 3, introduced earlier this month, represent a bet by Elon Musk that Tesla can increase overall sales and earnings by driving volume, even if each vehicle itself is less profitable. The billionaire CEO has prioritized robotaxis in Tesla’s future but must keep sales up while the new machines are developed.
The Model Y and Model 3 are priced $5,000 to $5,500 lower than predecessors in the United States. Cutting battery size, offering a less powerful motor, removing rear touchscreens and myriad other current details have saved thousands of dollars.
“Tesla’s intent is clear – trade short-term margin for long-term network scale,” said Shay Boloor, chief market strategist at Futurum Equities, who said some cannibalization of sales of pricier models was to be expected.
The new vehicles offer cheaper ways into a Tesla in Europe and Asia, where Chinese EVs are gaining ground, and partially offset the elimination of a federal tax credit in the United States. That credit ended in September, leading to a last-minute jump in U.S. sales that will be reflected in quarterly results. Analysts polled by Visible Alpha expect an 8.5% fall in deliveries for the year, an issue that Musk might address.
Analysts and investors have said the Standard variants are still too expensive. And Tesla is walking a careful line with many of the premium features as well as basic ones stripped out.
The smaller battery and the less powerful motor accounted for about 40% of the price cut, according to estimates from Sam Fiorani, vice president at research firm AutoForecast Solutions. Tesla avoided a deeper cut to the battery in order to offer a range of 321 miles (516.6 km) per full charge on both of the variants.
Instead, the company chose to remove many other parts, Fiorani said.
It dropped ventilated, vegan leather seats, ambient lighting and power-folding mirrors. Gone are even basic features such as seat-side buttons to change position, seat-back pockets and the waterproof lining in the front trunk or “frunk.”
“The removal of components is enough to make a buyer think about moving up to the other model,” said Fiorani.
Tesla’s gross margin from automotive sales has dropped in the past few years as it slashed prices and offered incentives to stave off rising competition and waning demand due to high interest rates, an aging lineup and consumer backlash against Musk’s far-right political views.
“The big question is, how much incremental demand is there at this point with the staleness of their vehicle portfolio?” said Garrett Nelson, a senior equity analyst at CFRA Research.
The results will also show the speed at which a key driver of Tesla’s profit is disappearing. The U.S. government has changed policy on regulatory credits that traditional automakers bought from electric-vehicle companies to make up for the tailpipe pollution from their gasoline-powered vehicles. The new policy means future sales of the credits are unlikely – and they may have dried up in the third quarter as well.
(Reporting by Abhirup Roy in San Francisco and Akash Sriram in Bengaluru; Editing by Peter Henderson and Matthew Lewis)
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